Buying and

Merchandising-II UNIT 7 PREPARING A MERCHANDISE

PLAN
Structure
7.0 Objectives
7.1 Introduction
7.2 Format for the Merchandise Plan
7.3 Planning Sales for the Current Period
7.4 Planning Stocks on the Floor
7.4.1 Stock Turnover or Sales to Stock Ratio
7.4.2 Basic Stock Method
7.4.3 Week’s Supply Method
7.4.4 Stock to Sales Ratio
7.5 Planning Reductions
7.6 Finalisation of the Merchandise Plan
7.7 Let Us Sum Up
7.8 Key Words
7.9 Answers to Check Your Progress
7.10 Terminal Questions

7.0 OBJECTIVES
After studying this unit, you should be able to:
● explain the importance of the merchandise plan and its format;
● analyse the planning of the sales for the current year;
● explain the planning of the stocks on the floor;
● describe the methods of reductions such as mark-downs;
● explain the finalisation of the merchandise plan.

7.1 INTRODUCTION
Preparation of the merchandise plan is a key step in a buying and merchandising
operation. It needs to be done very carefully as the overall purchase budgets for the
season are going to be decided based on this plan. The preparation of the plan
necessitates that the concerned merchandiser or buyer has a complete understanding
of the market scenario in which they are to operate. He/she must be aware about the
sales trend for the concerned product categories, understanding of the competitive
scenario, the trends in the related products and substitutes that may affect the sales
of the main categories, etc. It is important to have complete grasp on these issues.
The purpose of the merchandising plan is to finalize the right quantities of the right
value and at the right time. In this unit, you will learn about the importance of the
merchandise planning and the format for preparing it. You will further learn how the
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sales are planned for the current year. You will also learn about various methods for Preparing a
Merchandise Plan
the planning of the stocks and how reductions are done to clear the unsold stocks.

7.2 FORMAT FOR THE MERCHANDISE PLAN

Generally for bigger store operations like for chain of stores or for large format
stores, the merchandise plan forms a very important document as it is to reflect the
final objectives of the retail organization. In a retail organization, generally the top
management specifies the targeted profits based on the turnover projections. These
in turn are based on the gross margins and targeted operating expenses. There are so
many product categories involved in a large retail operation. Therefore it is natural
that the objectives have to be divided among different product categories on the basis
of their projected turnovers. The turnovers projected at each product category level
or store level need to be further calibrated into month-wise projections. All related
factors like sales, opening and closing stock figures, reductions, purchase requirement
need to be worked upon for finalizing the contents of the plan.
In large format stores, the top management objectives are explained by the VP
merchandising to the general manager of a particular category. He/she in turn
explains the management’s objective to the department managers or store managers.
The concerned store managers or department managers will have to work out the
detailed merchandise plan with the help of the buyers responsible for individual
products/items or range of items. These plans then get further consolidated at the
General Manager’s level for necessary corrections if any and then get forwarded to
the top management for final ratification and monitoring purpose.
Generally the merchandise plan is prepared on six monthly basis to match with the
main seasons. In the international scenario, they work with two seasons viz. Spring/
summer – which is for the period February to July. Another season is autumn/winter
– which is for the period August to January. In the Indian scenario too most of the
brands and retail organizations work with two seasons, and the periods do not vary
much. In India, the summer season duration is considered from March to August, and
winter duration is considered from September to February. This plan can be worked
in further detail to incorporate weekly details, particularly for smaller retail
organizations. The buyers and departmental managers or category managers play
very important role in the development of this plan. They will be directly held
responsible for its effective implementation and results.
A basic format used for the preparation of the merchandise plan has been given in
Table 7.1. The format specifies the season – spring or fall. Then it specifies the
months relevant for the season. The format is based on six months’ plan.
In Table 7.1, the first column includes the following parameters:
Seasons, sales, EOM stock, Reduction, BOM stock, Planned purchases in retail, and
Planned purchases at cost. The respective rows against each of the parameters
include the following fields:
● The figures achieved in the previous (last) year, so as to compare the planned
and actual figures for each parameter against it;
● Planned or targeted figures against the given parameters (here, note that figures
for all the parameters—except for sales and reduction—against planned activity
are derived with the use of the formulae);

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Buying and ● Revised figures against each parameter (so as to take care of the effect of
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actual figures—as the season progresses—on the rest of the months due to
change in sales or reduction activities);
● Actual figures against each of the parameters as the season progresses;
● Month-wise percentage break-up of the planned activity for sales and reduction
parameters against the overall plan for the season. This is done to indicate how
the sales and reduction activity was planned across different months or periods
of the given season.
Table 7.1: Format to prepare the merchandise purchase plan

Seasons Spring February March April May June July Season

or Fall or or Sep- or or No- or or Totals
August tember October vember December January

Sales Last (previous) year

plan
Planned percentage
of season
Revised plan
actual
EOM Last (previous) year
Stock plan
Revised plan
actual
Redu- Last (previous) year
ction plan
Revised
actual
Percentage of
plan reductions
BOM Last (previous) year
Stock plan
Revised
actual
Planned Last (previous) year
pur-
chases
at retail
plan
Revised
actual
Planned Last (previous) year
purchases
at cost
plan
Revised
actual
(Source: Chiplunkar RM, Product Category Management)
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In the preparation of the merchandise plan, proper emphasis needs to be given to Preparing a
Merchandise Plan
each of the parameters and the working of details against each of the respective
rows. In order to get proper understanding on each of the parameters and the
calculations involved, we shall cover each of the parameters separately.

7.3 PLANNING SALES FOR THE CURRENT PERIOD

Planning of the merchandise purchase begins with the planning of the sales. Let us
learn them in detail.
a) Last year’s sale: Sales plan needs to be prepared, based on last year’s trend
during the same season. It provides us the trend for month-wise percentage
break-ups during the season. This can then be used as the basis for working out
the month-wise sales figure for the current season. Last year’s figure acts as a
basis for preparing the current year’s sales projection. It ensures that sales
figures are not very high than last year’s figure, so as to make them un-
achievable. The percentage increase is not very low so as not to present any
challenge to the retail sales team. Study of last year’s figure also provides the
composition of different products’ sales within a category. This provides useful
trend for composing the category for the current season. Hence, mentioning last
year’s month-wise sales figures provides many useful features.
b) Planned or projected sales: The next step is to determine the sales target or
plan for the current season. This can be done by taking both the internal factors
and the external factors into account:
i) The internal factors: The merchandising team needs to take into
consideration the internal factors like – strategic changes if any. For
example, change in pricing policies or change in product composition within
the category or change in categories covered in the department or the
store. The next important internal factor could be promotional schemes if
any planned during the season. The impact of promotional schemes on the
sale figures during the concerned months is also taken into consideration.
The other internal factor that needs to be considered is changes in the
ambience, fixtures, displays, training of sales personnel, etc. within the
store. Also factor like increase in number of stores during the season
influence the stores sales figures.
ii) The external factors: The external factors have great influence on the
determination of sales growth. The sales growth depends on the factors
like:
● Economic environment or the world economic situation determines the
forecast for various product categories in the coming period. As was
experienced in the year 2008- 2009. Thus, the merchandising team
must look into forecast by government sponsored research agencies
(like CMIE, NCAER, etc. in India). Studies by banking industry;
research by trade organizations forms a good basis to understand
what should be the percentage increase in the sales which the retailer
can predict for the coming season.
● The changes in fashion trends or changes in product usages also have
great influence on the sales expectation for the season.
● Effect of competitive moves or policy changes by the competition can
have impact on retailer’s sales. For example, introduction of low
priced items by a large format store with a promotional support will 113
Buying and definitely have some impact on the sales of the existing stores of the
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same item.
● The changes in pricing or other important features of alternatives or
substitutes may also affect the sales of the existing products. For
example, lowering of prices of laptops has greatly affected sales of
the desk-top computers.
Let us look at an example to understand the working of the sales trend and sales
growth:

Example 7.1. Working of Sales Growth

Suppose a retailer after studying the sales forecast given by the trade association
decides to have an increase of 20% in its sales projection for the current season.
What will be the season’s figure if the sale during the last season was Rs 200000.

Solution
The increase in sales is of 20% over last year’s sales figure.
Thus, the sales increase = Rs 200000 × 20 % = Rs 200000 × 20 ÷ 100
= Rs 40000
Therefore sales projected for the current season = Rs 200000 + Rs 40000
= Rs 240000
c) Percentage trend: The percentage trend is derived usually from the trend for the
previous year same season.

Example 7.2. To Understand the Sales Trend for the Month

Now say we take the above example and would now like to work out the sales trend
for the current season. So let us study the sales trend for the previous season as
given here below:
Fall Season September October November December January February Total
Last 20000 60000 40000 40000 20000 20000 200000
year sales

% trend 10 30 20 20 10 10 100

As we saw earlier, the percentage sales for a month is derived by using the following
working:
Suppose percentage trend for the month of October = Sales value for October ÷ total
sales for the season
= Rs 60000 ÷ Rs 200000 = 30 %
Similarly a percentage sale for each of the months is worked out.
Using the above working, we can now work out the month-wise sales break-up for
the current season as shown below. The percentages for each of the month for
current season are taken from that for the previous season:
Fall Season September October November December January February Total
Current 24000 72000 48000 48000 24000 24000 240000
year sales
% trend 10 30 20 20 10 10 100
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Here the sales break-up for each of the months is done as follows: Preparing a
Merchandise Plan
For example, sales for the month of September = Total sales for the season ×
percentage for the month = Rs 240000 × 10% = Rs 24000
We use the above working to finalize sales figures for each of the months.
The percentage break-up for each of the months can be changed as per the expected
changes during the season. For example, many a times during the festive season,
Dussera and Diwali festivals may fall during different months as compared to the
previous year same season. Sometimes one may have to take into account the
promotion schemes, if any, planned for specific months.
d) Revised plan: The next step against the sales is to determine the revised figures.
This is done on the basis of the sales trend in the previous months for the current
season. Suppose the retailer thinks that there is going to be downward trend in sales
for the coming month by say a certain per cent based on the trend in the previous
month. The retailer or the merchandising team needs to affect the same in the sales
plan as explained in the example below:

Example 7.3. Change in Sales Figure for the Months based on the Sales
Trend
A merchandising team for ladies fashion-wear department finds that the actual sales
figures in the previous months of October and November have been very different
than the projected sales for the concerned months. Hence, it decides to revise the
sales figures for the next two months of December and January by taking the
average reduction percentage in sales for the previous two months as the basis for
sales revision.
Fall Season September October November December January February Total
Current 24000 72000 48000 48000 24000 24000 240000
year sales
Planned % 10 30 20 20 10 10 100
trend
Revised 25000 60000 44000 24000
Sales
Revised %
trend
Actual sales 25000 60000 44000

Let us first of all calculate percentage drop in the sales for the respective months as
compared to the projections for the concerned months.
Per cent drop in the sales for the month of October = (Sales Projected for October –
Actual Sales for October) ÷ Sales Projected for October
= (Rs 72000 – Rs 60000) ÷ Rs 72000
= Rs 12000 ÷ Rs 72000 = 16.67%
Per cent drop in sales for the month of November = (Rs 48000 – Rs 44000) ÷ Rs 48000
= Rs 4000 ÷ Rs 48000 = 8.33%
{The average reduction in sales for the months of October and November as we
would normally do = (16.67% + 8.33%) ÷ 2
= 25% ÷ 2 = 12.5 %}
You should note that the above method of calculating average reduction in sales for
the two months, though looks sound. As per the general method we are used to 115
Buying and calculate average values. It is not the correct method technically because here we
Merchandising-II
have to calculate average percentage reduction for the two months. Hence, we need
to use the following correct method:
The average reduction in sales for the months of October and November =
(Projected Sales for October and November – Actual Sales for the months of
October and November) ÷ Projected Sales for the months of October and November
= [(Rs 72000 + Rs 48000) – ( Rs 60000 + Rs 44000)] ÷ (Rs 72000 + Rs 48000)
= ( Rs 120000 – Rs 104000) ÷ Rs 120000
= Rs 16000 ÷ Rs 120000 = 13.33%
So, we can see the difference in the two methods for the calculation of average
reduction. The same method will become applicable for the calculation of the average
increase in the projected sales as compared to the actual sales.
Now making use of the average reduction percentage for the months of October and
November we shall calculate the percentage reduction in the projected sales for the
months of December and January.
Revised Sales for the month of December =Projected Sales for the month –
(Reduction in Sales Value as per average reduction %)
= Rs 48000 – (Rs 48000 × 13.33%)
= Rs 48000 – Rs 6398 (rounded off)
= Rs 41602~ Rs 41600
Similarly, revised sales for the month of January = Rs 24000 – (Rs 24000 × 13.33%)
= Rs 24000 – 3199 (rounded off)
= Rs 20801 ~ 20800
So, the Table with revised sales figures would look as follows:

Fall Season September October November December January February Total

Current 24000 72000 48000 48000 24000 24000 240000
year sales
Planned % 10 30 20 20 10 10 100
trend
Revised 25000 60000 44000 41600 20800 24000 215400
Sales
Revised % 11.61 27.86 20.43 19.31 9.66 11.14 ~100
trend
Actual sales 25000 60000 44000

In the Table above we have taken the actual sales figures in the revised sales figures’
row for the respective months in order to bring the completeness to the revised sales
figures row. Further, the percentages have been calculated for the revised sales trend
based on the total revised sales figure for the season, which is Rs 215400.
The advantage of revising the sales figures based on the trend is to help the team to
know what changes, if any, are necessary for adjusting the inventory in the store. The
changes can be made by way of reducing or increasing orders for the same in the
coming period or months.
e) Actual sales: At the end of every sales period or month, we have to make
immediate entries in the respective cells for keeping track of the trend. This needs to
be under constant review for taking effect of the same in the revised sales figures, if
116 any.
 Preparing a
Check Your Progress A Merchandise Plan

1. What are the importance of the merchandise planning in the retail business.
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2. Draw the commonly used format for the preparation of the merchandise plan.
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3. How does last year’s sale help in planning sales for the current year?
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4. Enumerate internal factors that are taken into account while planning of the
sales for the current year.
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5. Enumerate the external factors affecting the sales growth.
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7.4 PLANNING STOCKS ON THE FLOOR

You have learnt the format for the Merchandise Plan and the Planning Sales for the
current period. Let us now learn the Planning Stocks on the Floor. Once the sales
figures for the season have been estimated then you need to immediately plan for the
stocks to be kept in the store. For a retailer investment in stocks is a ‘working
capital’ investment. Hence, he/she has to work upon it very carefully, because finally
the returns will be calculated over this investment. The buyer or the merchandising
team has to work out for every season for the beginning of the month (BOM)
inventory and the end of the month inventory (EOM). Both are worked out in terms
of quantity and value. You should note that while preparing merchandise plan it is
normally the value which is of most important consideration.
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Buying and There are different methods for working out the stock value for keeping in the store,
Merchandising-II
which necessarily have to be in relation with the expected sales. An excess inventory
will hamper the quick reaction from the merchandising team, if there is slowdown in
sales. Further, this may also result in markdowns for quicker clearance of stocks that
may ultimately affect the return on investment. Blocking investment in excess stocks
also results in blocking the inflow of new varieties that helps in generating excitement
for consumers, and thereby, improvement in sales. The methods for determining
stocks on the floor are as follows:
Stock Turnover or Sales to Stock Ratio
The Basic Stock Method
Weeks Supply Method
Stock to Sales Ratio Method
Let us learn them in detail

7.4.1 Stock Turnover or Sales to Stock Ratio

This is an important parameter to assess the performance of a particular product or
category. It clearly tells us if the given stock of a particular product or category is
doing its job well. High value of sales to stock figure indicates that the stocks in the
given category are doing well. They are giving a turnaround of stock faster as
compared to another category which is having a low sales to stock ratio. If the stock
turnover or sales to stock ratio figure is, say 6, for a given season of six months, then
it means that the turnaround of the stock is happening six times in six months’ time.
This means on an average, the stock in a given product /category is moving around or
getting sold every month. Thus, we can define stock turnover as ‘the number of times
the average stock of a product or category is getting sold in a given period of time’.
The calculation of stock turnover can be done at retail value or at cost value or in
quantity terms. Generally as discussed in the section on “Methods of inventory
Valuation”, most of the retailers use retail value as the basis for calculating the stock
turnover figure. The stock turnover on quantity basis can be used only if all the items
covered in the quantity are of the same price per unit. The quantity based stock
turnover is also used for the major electronic items like mobile phones, washing
machines, refrigerators; or furniture items or automobiles of similar type and value.
The formula to be used for calculating stock turnover or sales to stock ratio at retail
value is as follows:
Stock Turnover or Sales to Stock Ratio = Net Sales Value at Retail for a given
period ÷ Average Stock Value for a given period
Generally, stock turnover is calculated for six months or a year. Once we have
determined the benchmark ratio for a given period, then one can check the stock
turnover ratios for a month or week too.
Calculating average stock value: This is an important parameter in calculation of
stock turnover and hence, has to be done in a systematic process. Average stock for
a given period of time is the total of ‘stock at the beginning of a period’ plus ‘stock at
the end of the given period’ divided by two. But as we all know, there are times
during a given period when the sales are low and hence, the retailer has to keep
lower stocks to match his return on investment in inventory. Generally, average stock
value is calculated for six months period or for a year, There could be some months
when the inventory carried is lower than usual due to lower sales in those months.
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Thus, effect of the inventory of such lower performing months also needs to be taken Preparing a
Merchandise Plan
into account to reach a right average figure. Therefore in such a case, the formula to
be used is as given below:
Average Stock Value for a given period = (BOM stock value for each of the months
in a given period + EOM stock value for the last month in a given period) ÷ Number
of months in a given period + 1
Thus, average stock value for six months period will be calculated as follows:
Average stock value for 6 months = (BOM stock for each of the six months + EOM
stock for the last month of the six months period) ÷ 7
Average stock value for a year = (BOM stock for each of the twelve months + EOM
stock for the last month of the twelve months period) ÷ 13
It must be understood that EOM of a particular month is the BOM for the next
month.
The merchandising team may decide to maintain the average stock at the existing
stores in order to achieve the desired sales to stock ratio. The team may use this as a
parameter for calculating and maintaining stock at the new store to be opened. This
parameter is also useful for calculating stocks using other methods as discussed in the
next sections.

Example 7.4. Calculation of Stock Turnover or Sales to Stock Ratio

A super market store maintained the BOM stock at retail value of certain cereals in
the store as given below for the period, January to July. The retail sales for the six
months, Jan. to June is of the value Rs 24 lacs. The buyer wants to know the sales
turnover ratio for the six months period, Jan. to June, so as to plan the stocks for the
coming period. What is the stock turnover ratio for the six months period?

Month BOM Stock Value in Rs

January 250000
February 200000
March 300000
April 250000
May 300000
June 250000
July 200000

Solution
The average stock value for the six months period Jan. to June = [BOM stock value
for each of the months (Jan. to June) + EOM stock value for June month]÷ 7
= (Rs 250000 + Rs 200000 + Rs 300000 + Rs 250000 + Rs 300000 + Rs 250000 + Rs
200000) ÷ 7
= Rs 1750000 ÷ 7 = Rs 250000
Therefore, stock turnover ratio = Sales for the six month period ÷ Average stock
value for the six month period
= Rs 2400000 ÷ Rs 250000 = 9.6
So, we can see that the turnover ratio being 9.6, the stock gets sold in less than a
month’s time. This means the buyer will have to organize replenishments too in less 119
than a month’s time.
Buying and If we know the stock turnover ratio and the sales turnover for the required period,
Merchandising-II
then we can calculate the average stock value for the given period as shown in the
formula below:
Average Stock Value = Net Sales Value ÷ Stock Turnover Ratio
Similarly if we know the average stock value and stock turnover ratio for a given
period, then the sales turnover can be calculated as follows:
Sales Turnover = Average Stock Value × Stock Turnover Ratio
So we can see that with the determination of the stock turnover or sale to stock ratio,
we are able to decide on certain important parameters for planning stock for a
particular product or category on the floor.
Importance of stock turnover: The merchandising team needs to be very particular
about maintaining the desired stock turnover ratio for generating good or targeted
returns for the department or the store. For items like grocery or daily used items, the
stock turnover is very high, which could even go up to 20, as compared to fashion
wear products. For example, ladies dresses where the buyer needs to keep a
reasonable number of styles/designs in different colours and price ranges which
makes the inventory value high. This leads to stock turnover ratio of about 3 to 4 for a
year. The merchandising team balances the stock turnover with the profit margins
covered on the products. It will be seen that profit margins on the products with fast
or high stock turnover ratio is lower as compared to that on products where stock
turnover ratio is low.
The buyer or merchandising team tries to influence the stock turnover ratio by using
the following tricks:
The team buys in small quantities and replenish more frequently as per the sales trend
for the department or store.
Have an arrangement with the supplier/manufacturer to maintain the inventory at his
own risk or on consignment basis. Thus passing on the complete risk of stock
maintenance/replenishment to the supplier/manufacturer of the products. Though in
such cases, the team has to compromise to certain extent on the profit margin.
According to Easterling C R et al., following are the advantages and disadvantages of
high stock turnover ratio.
Advantages
i. It limits the investment in stocks, thereby increases the possibility of high return
on investment in stocks.
ii. Reduction of expenses related with maintenance of stocks like insurance,
storage space, interest payment on investment in stocks, manpower for handling
the merchandise.
iii. Helps the team with taking fast decisions on any change in items or styles or
designs, as per the market trend. It facilitates infusion of new items or styles to
bring in freshness to stocks thereby creating excitement and appeal for the
merchandise.
iv. Lower markdowns which are necessary to move the slow moving merchandise
are brought to bare minimum level. It decreases the risk on non-moving
merchandise because of smaller lots of purchase.

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Disadvantages Preparing a
Merchandise Plan
i. The greatest risk of maintaining low stocks is of lost sales due to non-availability
of merchandise of the required type/styles. Also the lower width of range limits
consumer choices and may lead to loss of interest in merchandise.
ii. Another biggest headache is that of frequent placing of orders. This leads to
transportation expenses, handling cost, and maintaining account and warehouse
records.
iii. Loss of rebate or quantity discounts due to lower quantity of purchase.

7.4.2 Basic Stock Method

Basic stock is the quantity that is maintained all the time in the store or department
irrespective of the level of sales for the given product or category. This quantity is like
in reserve besides the required sales quantity as per the expected sales target. Thus,
we can define basic stock as the reserve quantity that needs to be maintained at all
times.
Let us define the working of basic stock method which takes into account the stock
required to cover the sales for the month or the given period (say a week or two
weeks) plus the reserve stock. Thus, the formula for working out the stock required
to be maintained at the beginning of the month is as follows:
Beginning of month stock = Sales for the month + Basic stock
The basic stock figure is derived from the average stock figure for a given season or
period as discussed in the earlier section and the average monthly sales for the
season/period as shown here below;
Basic Stock Value = Average Stock Value – Average Expected Monthly Sales
The above formula could be also used to work out quantity figures if we know the
average stock value and average sales figures in quantity terms. In our discussion, we
shall be considering above formula for working out retail value of stocks.
The average stock value is determined based on the stock turnover ratio the
merchandising team wants to achieve for the season or the year. You have already
learnt them in the earlier section.
Let us see an example to understand the calculation of the basic stock.

Example 7.5. To Calculate Basic Stock

A men’s wear department has targeted a sale of Rs 50 lacs for the summer season
(of six months) starting from March. The targeted turnover ratio to be achieved is 2
for the six months period. If for the month of March, the expected sales is Rs 8 lacs
then what will be the BOM stock?
Solution
i) The average stock value for the summer season = Expected sales for summer
season ÷ stock turnover ratio
= Rs 50 lacs ÷ 2 = Rs 25 lacs
ii) Expected average sales per month for summer season = Rs 50 lacs ÷ 6
= Rs 8.33 lacs
iii) Therefore, basic stock value for summer = Average stock value – average sales
per month
= Rs 25 lacs – Rs 8.33 lacs = Rs 16.67 lacs 121
Buying and iv) Thus, BOM stock value for March = Expected sales for March + basic stock for
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the season
= Rs 8 lacs + Rs 16.67 lacs = Rs 24.67 lacs

7.4.3 Week’s Supply Method

Week’s supply method is mainly used by departmental and super market formats as
they want to ensure that the supply position is in place for the given item. Weeks’
supply method gives a clear indication to the buying and merchandising team about
the stock coverage at a given point in time. The team may take needful action if the
situation demands any correction. In the Indian scenario, most of the large format
stores maintain 12 weeks coverage for apparels. Particularly for supermarkets where
many of their items are of regular and day to day usage, they find keeping week’s
coverage quite useful as they may be holding say about two weeks’ stock for a single
item. Hence, they can monitor the supply position in relation to sales very closely. As
we saw in the earlier section, the average stock to be maintained in the store in terms
of weeks coverage will be dependent on the sales to stock ratio. This may also be the
stock turnover ratio targeted for the season or the year.

Example 7.6. Calculation of Weeks’ coverage

A retail store desires to have a stock turnover ratio of 6 in a year for its apparel
department with a sales turnover of Rs 24 lacs per annum. So what should be the
number of weeks’ stock or supply to be maintained in the store?

Solution
The number of weeks supply to be maintained during a given period = Number of
weeks in a given period ÷ stock turnover required for a given period
= 52 ÷ 6 = 8.67 weeks stock/supply ~ 9 weeks supply
Therefore, the average stock value to be maintained = (Sales turnover for the year ÷
52) × 9
= (Rs 2400000 ÷ 52) x 9
= Rs 46154 × 9 = Rs 415386 ~
Rs 415000
So by maintaining a stock value of Rs 415000, i.e. 9 weeks’ supply on hand, we can
reach around 6 stock turnover ratio.

7.4.4 Stock to Sales Ratio

This is another way of finding stock coverage for a given period, which is somewhat
similar to weeks’ supply method. It is a stock on hand at the beginning of the month
with respect to sales for the month. This ratio gives a clear indication on the number
of times the sales for the month is being covered. Suppose the merchandising team
has decided on maintaining certain stock coverage for the expected sales for the
month. In this case, it becomes easier for the retail store team to organize their
store’s stock position accordingly at the beginning of the month. The formula for
calculating Stock –Sales ratio is as follows:
Stock to Sales Ratio = BOM stock value ÷ Sales for the Month
Generally it will be observed that this ratio is used for a short period like for a month
or weeks. It provides quick understanding of the stock position in relation to the

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expected sales for the given period. As we need to monitor stock position with Preparing a
Merchandise Plan
relation to the expected sales for a given period, this ratio takes into account the
beginning of the month or period stock value. From the formula given above, we can
derive the beginning of month stock value if we know the expected sales for the
month and the expected ratio to be attained for the month, as explained here below:
BOM Stock Value = Expected Sales Value for the Month × Expected Stock to
Sales Ratio for the Month

Example 7.7. Calculation of Stock to Sales Ratio and the BOM Stock Value
A departmental store achieved an average sales turnover of Rs 10 lacs per month
with a BOM stock value of Rs 16 lacs during a summer season. Now it wants to
decide the BOM stock value for the summer season in the coming period with an
expected sale per month of Rs 15 lacs. What should be the BOM stock to be
maintained?

Solution
Stock to Sales ratio achieved in the earlier season = BOM stock ÷ Sales for the month
= Rs 16 ÷ Rs 10 = 1.6
Expected BOM stock required for the next season = Expected sales for the month ×
stock to sales ratio for the previous season
= Rs 15 lacs × 1.6 = Rs 24 lacs

7.5 PLANNING REDUCTIONS

Reductions play an important role in the operation of any store. As you have learnt in
the section on ‘Pricing and Markdowns’, this element of retail operation is
unavoidable, if the retailer has to run the store in an on-going manner. Reductions
comprise the elements of markdowns, discount to employees, discount to customers,
and pilferage/shrinkage, if any. The percentage reduction is estimated based on past
experience and is calculated by dividing net reduction value by net sales value.
Markdowns constitute the largest percentage of the reduction value and hence, for
many retailers it is synonymous with reduction percentage.
Reduction percentage = Total amount of reduction value comprising all the elements
÷ Net sales value
From the above formula, we can derive the targeted markdown value or reduction
value as follows:
Total reduction value = Net sales value × Reduction percentage

7.6 FINALIZATION OF THE MERCHANDISE PLAN

For finalization of the merchandise plan we have to finally plan for the purchases
based on retail and at cost price. Here it must be noted that just knowing retail value
of purchase is not enough as the buyer finally must know in real terms the investment
necessary for the procurement of the required stocks. Hence, we can state that
finalization of the merchandise plan happens in two stages:
A. Planning purchases at the retail value; and
B. Planning purchases at the cost value.
Let us learn them in detail. 123
Buying and Planning purchases at the retail value: This is a crucial stage when all the
Merchandising-II
elements of plan converge and give a final shape to the plan. The purchase planning
has to take into consideration the elements of sale to be achieved, opening inventory
or BOM inventory available, the EOM inventory or closing inventory necessary for
taking care of the next month’s/period’s opening inventory. The planning should also
take care of the total reductions planned for the month or period. Normally, purchase
planning is done on monthly basis for balancing the cost of the procurement process
with that of the risk or cost involved with too frequent or very low frequency of
purchases.
We define the planned purchases at retail as per the following formula:
Planned Purchase for the Month at Retail Value = Net Sales Planned + Reductions
Planned + EOM Stock value – BOM Stock Value
Since reduction value is part of the overall sales plan, it is taken as part of the
purchase value. Otherwise, there will be deficiency in the actual sales happening in
the store for not planning for the reduction sales (as there will be lower stocks than
the planned stocks for the month).
We reduce BOM stock from the total value of sales plus reduction value plus EOM
stock value. This is done because this is the stock we carry forward from the earlier
month and hence, the buyer does not have to plan for its purchase during the current
month.
Let us look at the calculation of purchase value from the example given below.
Example7.8. Calculating Planned Purchase Value at Retail
The buyer of the ladies wear department has planned for sales during the autumn-
winter season as per the following plan:

Month Sales BOM stock Employee discounts Markdowns

planned (Rs) (Rs) (Rs) (Rs) (Rs)
September 200000 400000 10000 20000
October 225000 450000 12000 22000
November 175000 350000 8000 18000
December 250000 500000 12000 25000

Calculate the purchases for the months of September, October and November.
Solution
Months Purchase value = sales + Reduction + EOM stock – Purchase
BOM stock value
September Rs 200000 + Rs 30000 + Rs 450000 – Rs 400000 Rs 280000
October Rs 225000 + Rs 34000 + Rs 350000 – Rs 450000 Rs 159000
November Rs 175000 + Rs 26000 + Rs 500000 – Rs 350000 Rs 351000

The purchase value at retail differs every month as per the planned sales, reduction
value, and the EOM and BOM stock figures.
Planning purchases at the cost value: Now the calculation of purchases at cost
value is basically a conversion of retail value of purchase to cost value. For
converting the retail value to cost value, we need to first determine the initial mark-up
per cent planned for the given season. This is done because for converting the retail
value to the cost value we have to use the following formula as discussed in the
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earlier unit.
 Preparing a
Planned Purchases at Cost Value = Planned Purchases at Retail Value × Merchandise Plan
(1 – Initial Mark-Up % Planned)
So if we have to convert the retail purchases in the previous example to cost value,
the working will look as follows:
Suppose the initial mark-up planned for the season is 40 per cent, then the purchase
at the cost value will be as follows:

Month Retail purchase value Purchases at cost value

September Rs 280000 Rs 280000 × (1- 0.4) =Rs 168000
October Rs 159000 Rs 159000 × (1- 0.4) = Rs 95400
November Rs 351000 Rs 351000 × (1- 0.4) = Rs 210600

Thus, with the calculation of purchases at the cost value, we reach the final stage of
the merchandise plan. By knowing the planned cost value of the purchases at retail
value, the team is able to know the investment they will need to make into their
monthly purchases planned.

Check Your Progress B

1. Enumerate the methods used for determining the stocks on the floor of a retail
store.
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2. What is meant by the stock turnover?
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3. How is average stock value calculated for a given time period?
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4. What are the importance of the stock turnover in the retail business.
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Buying and
Merchandising-II 5. Which of the following statements are True or False?
i) Merchandise plan reflects the target objectives of a retail store.
ii) Economic environment is an important internal factor for preparing the
merchandise plan.
iii) The percentage trend is derived from the trend of the previous year in
the same season.
iv) A category doing well has low sales to stock ratio.
v) Basic stock is the quantity that is maintained all the time in the store
irrespective of the level of sales.

7.7 LET US SUM UP

The preparation of the merchandise plan is a key step for the successful operation of
a retail business. For this purpose, the retailer must understand the market scenario,
the sales trends of various products categories, market competition and trends in the
related products.
In a retail organization, generally the top management outlines the targeted profits
based on the turnover projections, which in turn is based on the gross margins and
targeted operating expenses.
Generally, the merchandise plan is prepared on six monthly basis to match with the
main seasons. In the international scenario, they work with two seasons, viz. spring/
summer (February to July) and autumn/winter (August to January). In India too,
most of the retail organizations work with two seasons- summer (March to August)
and winter (September to February).
Planning of sales for the current year determines the merchandise purchase. For the
planning of sales, various factors such as last year’s sales, internal factors like
strategic changes if any and the external factors, such as economic environment,
changes in the fashion trends, market competition, etc. are taken into account.
After the projected sales have been decided, the retail organization has to plan for the
stocks to be kept in the store. For a retailer, investment in stocks is a ‘working
capital’ investment. Hence, He/she has to work upon it very carefully so that there is
a maximum return over this investment. The methods used for determining the
stocks are stock turnover or stock to sales ratio, the basic stock method, week’s
supply method and stock to sales ratio method.
Reductions play an important role in the operation of a retail store. It comprises
markdowns, discount to employees, discount to customers and pilferage/shrinkage, if
any. Markdowns constitute the largest percentage of the reduction value and hence it
is often used synonymously with the reduction percentage.
For finalization of the merchandise plan, one has to finally plan for the purchases
based on retail and at the cost price. It is not enough just to know the retail value of
the purchase. The buyer must know in real terms the investment necessary for the
procurement of the required stocks.

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 Preparing a
7.8 KEY WORDS Merchandise Plan

BOM Stock : A comprehensive list of raw materials, components and

assemblies required to build or manufacture a product.
EOM Stock : The EOM shows the relationship between volume and
price change.
Format : A plan for the organization and arrangement of a
specified production.
Gross Margins : Gross income divided by net sales, expressed as a
percentage.
Merchandise : Household, personal use, or commercial goods, wares,
commodities, bought and sold in wholesale and retail.
Operating Expenses : An expense incurred in carrying out an organization’s
day-to-day activities, but not directly associated with
production.
Product Categories : The specific generic to which a good or service
belongs, for example, while coke is a brand name, the
product category to which it belongs is soft drinks.
Projected Sales : A proposal, scheme or design of sale.
Stock : Inventory, a quantity of something accumulated as for
future use.
Substitutes : A person or thing that takes or can take the place of
another.

7.9 ANSWERS TO CHECK YOUR PROGRESS

B5. i) True ii) False iii) True iv) False v) True

7.10 TERMINAL QUESTIONS

1. What is meant by merchandise plan? Explain different factors that are taken
into account while preparing it.
2. Describe a format which is commonly used for preparing a merchandise plan.
3. What do you mean by targeted sales? Discuss relevant factors that affect it.
4. What is meant by stocks? Describe different methods that are commonly used
for determining it.
5. Explain various types of reductions offered by a retail store. How is reduction
percentage calculated?

Activity
Study the basis of the merchandise plan of a departmental store and analyse how
successful is it?
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